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  1. 046In your head: you buy a business with EBITDA of 50 at 8x, funded 50% with debt. EBITDA grows to 75 over 5 years, cumulative free cash flow of 100 repays debt, and you exit at 8x. What are the money multiple and the IRR?Mental paper LBOsCoreNeuberger BermanNew York · 2022

    Try it first

    What is the money multiple on the equity?

    Show the worked solution

    2.5x and an IRR of about 20%. Entry EV is 50 x 8 = 400, half debt, so equity is 200. Exit EV is 75 x 8 = 600, and debt has fallen from 200 to 100, so exit equity is 500. 500 over 200 is 2.5x. Over five years that is about 20% a year, since 1.2 to the fifth is about 2.49.

    What is the fastest way to do this in your head?

    Buy a flat for Rs 40 lakh with a Rs 20 lakh loan. Five years later it is worth Rs 60 lakh and you have paid the loan down to Rs 10 lakh. Your stake went from Rs 20 lakh to Rs 50 lakh. Every paper LBO is two balance sheets, entry and exit, and the answer is exit equity over entry equity, where equity is EV less debt each time. Write the four numbers, subtract twice, divide once.

    Two balance sheets and a subtractionEV 4008x EBITDA 50Debt 200Equity 200Entry, year 0EV 6008x EBITDA 75Debt 100Equity 500Exit, year 5500 / 2002.5xIRR about 20%Where the 300 gain came fromgrowth 200debt 10025 more EBITDA x 8 = 200cash flow repays 100 of debtmultiple unchanged, adds 0
    Entry EV of 400 is funded with 200 of debt and 200 of equity; at exit EV is 600 and debt 100, so equity is 500, a 2.5x return made up of 200 from EBITDA growth and 100 from debt paydown.

    How do you get the IRR without a calculator?

    Carry three anchors for a five-year hold. 2x in five years is about 15% a year, 2.5x is about 20%, and 3x is about 25%. 1.2 to the fifth is 1.2 x 1.2 = 1.44, then 1.73, 2.07 and 2.49, so 2.5x is a touch over 20%: 20.1%. Saying the anchor and then the check sounds far more assured than reaching for a formula.

    The relationship
    MOIC=E5 m−D5E0 m−D0=75×8−10050×8−200=500200=2.5xMOIC = \frac{E_5 \, m - D_5}{E_0 \, m - D_0} = \frac{75 \times 8 - 100}{50 \times 8 - 200} = \frac{500}{200} = 2.5x
    E_0, E_5EBITDA at entry and exit, 50 and 75
    mthe multiple at both ends, 8x
    D_0, D_5debt at entry and exit, 200 and 100
    What it says in wordsThe money multiple is exit equity over entry equity, each one EV less debt.

    Then split the gain, because the interviewer will ask where the return came from. EBITDA rose 25 at a constant 8x, adding 200 of value; cash flow repaid 100 of debt; the multiple did not move, so it added nothing. The limitation: the sums ignore fees at entry and any cash left on the balance sheet at exit, both of which a real model would carry.

    Where candidates lose it

    The common loss is computing the EV return, 600 over 400, and calling it 1.5x. The question is about the equity, and leverage plus paydown makes the equity grow much faster than the EV.

    The second loss is forgetting the debt paydown and using 200 of debt at exit, which gives 400 of equity and 2.0x. Track the debt at both ends.

    What the interviewer asks next

    • Exit at 7x instead of 8x. What are the multiple and IRR now?
    • What would the return have been with no debt at all?
    • How much of the return would you attribute to the sponsor's work, and how much to leverage?

    Asked at Neuberger Berman, Private Equity, New York, 2022 (Wall Street Oasis): The most difficult was the more advanced industry-specific technicals and paperback LBOs